The Dalian Thermal Power Co.,Ltd. (SHSE:600719) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term shareholders would now have taken a real hit with the stock declining 6.1% in the last year.

Although its price has dipped substantially, given around half the companies in China's Integrated Utilities industry have price-to-sales ratios (or "P/S") below 3x, you may still consider Dalian Thermal PowerLtd as a stock to avoid entirely with its 5.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Dalian Thermal PowerLtd's Recent Performance Look Like?

For example, consider that Dalian Thermal PowerLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Dalian Thermal PowerLtd?

Dalian Thermal PowerLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 3.7% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 8.2% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Dalian Thermal PowerLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Dalian Thermal PowerLtd's P/S?

Dalian Thermal PowerLtd's shares may have suffered, but its P/S remains high. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dalian Thermal PowerLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Dalian Thermal PowerLtd you should know about.

If you're unsure about the strength of Dalian Thermal PowerLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com